Preamble:
That the current state of the oil and gas industry in Nigeria is wobbly is not conjectural. Neither is there any doubt that the impact of the industry on the overall economy of Nigeria leaves much to be desired. The industry currently contributes less than 10% to the Gross Domestic Product (GDP) in the country and this is not necessarily because of any remarkable growth in the non-oil sectors. Perhaps, declining industry activities and geopolitical complexity of the global oil and gas business, in more recent times, have contributed to the wobbling of the petroleum sector in Nigeria. The good news, however, is the Petroleum Industry Act 2021 (PIA2021), which decreed three governing institutions to effectively, efficiently, equitably, and ethically manage petroleum operations for sustainable economic growth and development in Nigeria. The aim of this op-ed is to highlight, yet again, the contemporary petroleum issues and problems in the oil and gas industry and the prospects the PIA 2021 offer within the context of the state of the oil and gas industry and outlook in Nigeria, in time like this.
Contemporary Petroleum Sector Issues
The global petroleum industry is complex with three specific segments for value creation and additions. These segments are upstream, midstream, and downstream operations. Each of the three segments has unique issues and problems that contemporaneously have implications on the investment outcome in the other segments. Of course, there are also general issues and problems that are germane to the dreary contributions of the oil and gas sector on the aggregate economic output in Nigeria illustrated in Chart 1 and 2.
The general issues and problems portrayed in Charts 1 and 2 distressing the oil and gas industry in Nigeria are multi-dimensional. They include but are not limited to transparency and accountability, governance and regulatory ineffectiveness, institutional incompetence, or ineptitude. These problems and issues are coupled with rent-seeking, rent-sharing, and prebendal mindsets, and of course, transactional leadership attitudes.
The interrelatedness of these issues, perhaps, explains the low impact of the industry on the aggregate economic output; even though the contribution of the industry to fund the budgets of governments across the three tiers of governance in Nigeria is significant. Thus, what matters is not access to revenue just for political governance but translating huge revenue access to foster a business environment conducive for petroleum industry operations with linkages to non-oil sector operations. The identity equations relating Gross Domestic Product to Private Investment, Government Spending, Household Consumption and Net Export, illustrate the point. Unfortunately, if government spending exerts too much influence on the economy, declining government revenue makes the aggregate economy extremely weak. Nigeria offers a classic lesson on how not to spend petroleum revenue in that regards.
PIA 2021 Prospects on Petroleum Sector Issues
Industry Governance–The PIA 2021 created efficient and effective governing institutions, with clear and separate roles for the oil and gas sector. The institutions in the PIA are fashioned to address the governance gaps and improve capacity delivery in a transparent, accountable, and appropriate manner, on time, and in a cost-efficient manner. Two regulatory institutions, the Petroleum Commission and the Petroleum Authority have well-defined mandates to regulate, manage, and monitor upstream operations and the midstream and downstream operations, respectively.
The separation of roles and responsibilities of these institutions needs a re-evaluation in the first 100 days of the new administration. The independence of the institutions is very much at stake, and this is the anchor for efficient, effective, and equitable delivery of the PIA mandates. It is one thing to be endowed with prolific geological and geophysical basins and it is also fabulous to have a progressive and value-creating fiscal framework. However, optics matter a lot and the perception of investors on the governance of the industry speaks volumes in terms of sustainable investments to grow reserves and expand production capacity. Nearly two years after the PIA, these institutions are still quivering and are yet to hit the ground running. Perhaps, this reflects a rudderless Ministry of Petroleum Resources with too many proxies serving as Minister of Petroleum Resources mandated in the PIA to set the general policy directions for the oil and gas sector.
Competitive Downstream Market – The Petroleum Authority tasked with regulating the midstream and downstream petroleum value chain seems not to catch the PIA expectation regarding downstream petroleum operations. Letting go of the pricing regulatory mindsets in the petroleum downstream in Nigeria remains a tradition, despite its illegality. Fixing petroleum products prices in the downstream is detrimental to the economic efficiency as fully anticipated by the Act. It makes addressing the diminishing investments in the sector difficult and could easily complicate efforts at reversing the declining investment attractiveness and infrastructure deficits in the sector. I sincerely understand that a “Leopard” cannot change its skin without surgical operations that may take time to heal. There must be a redirection in the implementation philosophy of the PIA 2021, in my opinion, to be in alignment with the competitive intentions of the framers of PIA 2021.
Additionally, permit me to restate the following assertions from our January 2023 op-ed in the Valuechain Magazine. “The prevailing money market disequilibrium with higher demand for forex than supply has literally made the PIA commercial institution a single importer of motor fuels, driven mostly by energy supply security but with a significant cost to the federation account. The Act was intentionally crafted to eliminate the glaring anti-competitive conduct in the petroleum downstream markets. Of course, removing subsidies can be politically burdensome even though it is glaringly unsustainable.” But the Act calls for the deregulation of the downstream sector and doing anything else sends a wrong signal to potential investors.
Removing subsidy is not going to make the economy worse off than it is now or even if it had been removed in 2015 as suggested by many experts, including yours sincerely. Removing subsidy will more likely than not rekindle Nigeria’s economy and perhaps lessen the pressure it imposes on the forex market. The “japa” option to the Diaspora may likely disappear with time, too. While in the short run the price of motor fuels might rise but it will stabilize in the not-too-distant future. The removal would be just a temporary shock with a short adjustment process subject to foreign exchange stability and Dangote refinery becoming operational as scheduled. The laws of demand and supply work even under changing market conditions. The functionality is not static but dynamic.
Declining Revenue Issue–Unquestionably, the declining trend in upstream petroleum revenue is in the conscious awareness of every Nigerian. The key determinants of revenue declining trend are contemporaneously linked to upstream production, crude oil price volatility, system leakages, and insecurity. Producing the OPEC-allocated quota remains quite challenging because of oil theft and institutional inefficiency. Unfortunately, Nigeria started rather late to leverage on its natural gas reserves accordingly and appropriately, despite the laudable natural gas policy framework adopted in 2017. Mr. President-Elect, please do not abandon the established good natural gas program initiated by your predecessor. Don’t destroy good foundations in the oil and gas sector, instead build on them. However, do not hesitate to let adding value to the sector be the key motivation in your decision-making process. Listen, learn and lead not with political expediency prime movers but competent professionals. Passed on policy recommendations from you political appointees for the sector to professionals who are literally and supposedly your eyes and ears on petroleum industry and sector matter. Your political appointees must be genuinely apolitical.
However, let us state the obvious, reversing the declining revenue trend in the short run will be a tall order because the PIA 2021 fiscal framework emphasizes more on delay revenue extraction mechanism than early revenue extraction in the upstream sector. This makes a lot of sense as competition for upstream investments become keener under the emerging energy transition era with many more oil and gas producing countries emerging by the numbers in pursuit of investments to develop the black gold. Additionally, the PIA 2021 fiscal framework is more favorably disposed to offshore contractual upstream arrangements than the prevailing concessionary upstream arrangements in the shallow water and onshore terrains, which traditionally offers more revenue to the government because of JJV and PPT. Further, though a progressive royalty scheme surfaced in the PIA 2021 for the deepwater terrains, exempting the terrains from resource taxes dampens the revenue outlook for the federation.
Preliminary studies suggest that government access to revenue may also shrink in the short run, unless output expands in response to the fiscal generosity offers in the PIA 2021 for new assets as well as converted assets. The rising technical cost must also diminish. Interestingly, too, the interpretation of the transformation of NNPC to NNPCL in the PIA with respect to federation assets it holds, does not help in arresting the declining government revenue from upstream asserts.
Again, hope is not lost. The new administration must let go of political expediency as mentioned earlier, as the key driver underling policy decisions with aggregate and national economic implications, including appointments to agencies and departments in government institutions. The historical tradition of asking NNPC to spend money on behalf of government is counterproductive in this regard.
We understand the process leading to the commercialization of NNPC, and the framework anticipated for its sustainability. It is imperative to note that commercialization is not synonymous to privatization. Paraphrasing, one of the objectives stated in Chapter One of PIA 2021 within the context of industry governance and institution is to establish a framework to create a commercial institution christened as NNPC Limited in the PIA, as a national petroleum company. The commercial institution so created shall be commercially oriented and profit-driven. Dear, Mr. President-Elect, there is nothing that says a national oil company unless privatized cannot be profit oriented. We have great examples of profit-oriented national petroleum companies worldwide. However, a reappraisal of the created framework, which established NNPCL is highly recommended to bring it back to focus and to avoid crowding out the petroleum industry operational space with diseconomies of scale. Perhaps, that framework so created after PIB 2020 became PIA 2021 needs surgical operations to realign the national petroleum company with the framers’ intentions.
Host Communities’ Challenges – The optimal pathway to sustain prosperity in the petroleum host communities and enhance direct social and economic benefits from petroleum operations in the communities remains tenuous. Nearly every instrument, NDDC, Ministry of Niger Delta, Amnesty programme, 13% derivation fund, devised by the federal government to enhance peaceful and harmonious relationship between operators and host communities has fully worked. Perhaps, because of agency theory, whereby those engaged to deliver cater to themselves first before the host communities. It is not surprising that these instruments are perceived as indirect benefit from petroleum operations in the communities.
Thus, the philosophy behind getting the community to articulate and prioritize projects is innovative in the PIA 2021 and reflects a reward mechanism to the communities as legitimate stakeholders in petroleum resources development. Because the relationship between the stakeholders—communities and operators is predetermined, the framers of PIA Chapter III made mutuality of interests the cornerstone of the host communities fund. Posterity is critical if prosperity is to be sustained; thus the allocative structure of the fund is well-defined to keep the future in view. Additionally, such relationship demands effective communication, cooperation, and responsibility of stakeholders to improve security of infrastructure and enhance peace in the community. The relationship is not opportunistic and the benefits accruing to stakeholders cannot be justified on the basis of the motives of the individual stakeholder. Optimizing mutuality of interests is key to enhancing security of assets and workers.
Policy Institution Quandary – The powers of the Minister of Petroleum can literarily be interpreted as the functions of the Minister of Petroleum in the PIA. Unfortunately, no institution is established by PIA to facilitate the effective deliverability of the PIA mandates for the Minister. Some may argue that the Ministry of Petroleum Resources is the institution to support the functional responsibilities of the Minister.
An evaluation of the immediate past eight years makes it plausible to argue that the support base for the functional responsibilities of the Minister of petroleum has been the presidency, to a large extent. This constitutes the big quandary that bedeviled the policy process in the petroleum sector, lately, as well as the general policy supervision over the affairs of the petroleum industry. As mentioned earlier, there are just too many proxies of the Minister of Petroleum Resources on this subject matter. I hasten to insinuate that the lackluster impact of PIA 2021 on the sector is consequential to the dilemma in defining the institutional base of the Minister of Petroleum Resources with respect to discharging its PIA mandates. Thus, and I stand corrected, only but few petroleum policy directives have been issued and published in the Gazette, if at all any, in accordance with PIA 2021 Part II Sections 4 and 5.
The essentialness for a competent policy institution to facilitate proper execution of the powers of the Minister of Petroleum enacted in Part II, Section 3 of the PIA 2021 is not conjectural. Unfortunately, as things stand now, the Ministry of Petroleum Resources is structurally deficient, technically inept, and managerially incompetent to support the Minister in the exercising of the powers mandated in the Part II of PIA 2021. Interestingly, the success of PIA 2021 anchors on three separate but equal institutions—policy, commercial, and regulatory, with a well-defined complementary role.
Unfortunately, the institution mandated to formulate, monitor, and administer government policy in the petroleum sector is the weakest link in terms of technical capability, structural effectiveness, and organizational efficiency. Yet, the Commission and the Authority must comply with policy directives issued by the Minister on upstream petroleum operations and midstream/downstream operations, accordingly.
The dependence of the Minister on technical assistants drawn from different institutions of government or industry players to exercise the power of the Ministers limits policy continuity and sustainability from one administration to the other. Mr. President-Elect, the powers of the Minister of Petroleum mandated in the PIA 2021 requires competent technical and managerial professionals to facilitate easy acceptance of and compliance to ministerial directives to the Commission and the Authority. Such professionals and managerial staff must not be inferior in competency levels and compensation to professionals and managerial staff in the Commission and the Authority because of mutuality of interests. It is imperative to restructure the Ministry of Petroleum alignment with the petroleum industry structure—upstream, midstream and downstream and the departmental and/or divisional units in the commercial and regulatory institutions.
Summary and Concluding Remarks
That the current state of the oil and gas industry in Nigeria is bothersome is not conjectural. Neither is there any doubt that the impact of the industry on the overall economy of Nigeria leaves much to be desired. The general issues and problems distressing the oil and gas industry in Nigeria are multi-dimensional. The good news, however, is the Petroleum Industry Act 2021, which provided three governing institutions to effectively, efficiently, equitably, and ethically manage the industry for sustainable economic growth and development. The PIA framers understood the essentiality of good governance, transparency and accountability, progressive royalty framework, and relational peace and security in host communities.
The implementation of the Act is going on steadily, though not without some hitches and apparent deviations from the intentional framing of some of the provisions in the Act to resolve some of the issues and challenges limiting the deliverability of the petroleum sector potential to create and add value to the national economy.
Unfortunately, the needle seems not to be “threading the cotton” fast enough to ameliorate the governance issues in the oil and gas sector. A review of the process is recommended.
Of course, we sincerely and perfectly understand that an advice given may not necessarily be acknowledged. Let us, however, for posterity, offer one or two anyway. The governance of the oil and gas industry is more complex than the rent-seeking and rent-sharing political empire, called Nigeria. The industry remains the engine to propel the economy of Nigeria to prominence. Thus, it requires full attention of a dynamic and functional Minister of Petroleum to correctly lead the industry in alignment with the PIA framers’ intentions. The dwindling fortune of the industry over the last decade offers good lessons on how not to govern the oil and gas industry in the emerging energy transition era. So, please, avoid the temptation to hold on to the Minister of Petroleum portfolio as enacted in the PIA 2021.
The second advice is on the dependence of the Minister of Petroleum on technical assistants and advisors drawn from different institutions of government or industry players to exercise the power of the Minister. Mr. President-Elect, the powers of the Minister of Petroleum, as mandated in the PIA 2021, require competent technical and managerial professionals to sustain institutional memory of Ministerial decisions from one administration to another. It is therefore imperative to restructure the Ministry of Petroleum accordingly, in alignment with the petroleum industry structure and the departmental and/or divisional units in NNPCL, the Commission, and/or the Authority with competent and adequately rewarded personnel.
Finally, Dear Mr. President-Elect, please accept our warm congratulations on your election as the President of the Federal Republic of Nigeria. Our best wishes are assured with highest esteem.